If your company has a healthy fiscal income statement but has heavy short-term cash flow requirements, e.g. due to cyclic business swings, seasonal fluctuations or for a business expansion, it can seek cash flow financing to meet it's short-term capital requirements. You might need a cash flow loan simply for working capital and growth. Or, if you're planning to undertake a business acquisition or a merger or buyout, the cash flow requirements can be pretty enormous and you should start looking at cash flow lending solutions that are available.

Recapitalizing your debt and equity mixture in an effort to stabilize your company's capital structure is another reason you might need cash flow lending. Another expensive restructuring action that might call for a cash flow loan is streamlining your operation by spinning off unrelated or less productive subsidiaries of your business into independent entities. If you're considering pursuing a cash flow loan, use the following as a guide to cash flow lending basics:

1. Obtain a basic understanding of what cash flow lending is all about.

2. Locate commercial cash flow lending companies to get you the funding you need.

3. Get more in-depth knowledge about cash flow funding through formal training.

Action Steps
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Understand how a cash flow based loan works

Cash flow financing is a type of debt financing. A fiscally sound company has an isolated need for a large amount of capital, so a bank lends it money against the positive cash flow of the company. This differs from an asset-based loan, which collateralizes assets like real estate to secure the loan.

I recommend: The Minority Business Development Agency's (MBDA) website offers explanations of many business-related terms, including cash flow financing. PubCoWhitePapers provides a corporate insider's handbook online that provides complete instructional information about cash flow lending.

Understand commercial cash flow lending

There are a handful of commercial cash flow lenders in the United States, though it's very common in Australia and New Zealand. Providers of cash flow loans base their evaluation of the borrower's ability to repay the loan based on one of a number of EBITDA formulas. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.

I recommend: Danversbank is a lender that will provide commercial cash flow lending services of up to $20 million to businesses in Maine, New Hampshire and Rhode Island. For larger loans, they are able to partner with other banks. Cash flow lender CIT is expanding it's commercial cash flow lending with a focus on companies with an EBITDA of $10 million or greater. They are also willing to hold up to $20 million of debt on their balance sheet, either as a sole investor or part of a larger deal.

Learn all about cash flow funding and all facets of finance through formal training

Whether you are a lender, a broker or a borrower it certainly pays to have a full understanding of what's happening when you're involved in a multi-million dollar financing transaction. In just a few days, you can gain an in-depth knowledge of how cash flow lending works and what does and doesn't make sense for a lender when a borrower asks for $20 million and doesn't have assets to put up as collateral.

I recommend: Infrastructure Development provides a 19-module training course called the "Project Finance Course," which specifically focuses on teaching cash flow lending. The New York Institute of Finance offers a five-day credit risk analysis training course, which includes the topic of cash flow lending.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Your business may have cash flows you hadn't thought of that could be used to collateralize a cash flow loan, like business notes, equipment leasing, medical or business receivables, or equipment sales or leasebacks just to name a few.

Cash flow funding is based on your business’ future cash flow or invoicing. Unlike asset based lending which looks at the value of your assets, inventory or equipment, cash flow lending bases a cash flow loan on what you have coming in. If you wait three months to receive payment for an invoice worth $15,000, your business stifles while you wait for your money. Cash flow lenders look at your invoices and offer cash flow loans based on a percentage of your future cash flow.

Increased competition among providers of cash flow loans means cash flow lending companies are willing to take larger risks to provide cash flow financing. Currently business owners in need of commercial cash flow lending can get an advance rate of 4 to 5 times the business’ earnings before interest, taxes, deprecation and amortization (EBITDA).

With cash flow lending, you pay a lower fee than you do with asset based lending. You already have the money to pay the cash flow lender, which means you have more flexibility than you do with asset based lenders. The standard term for a cash flow loan is three to seven years.

Cash flow funding provides your business with cash to:

1. Use as working capital to cover your business expenses
2. Acquire, merge or buy out other businesses
3. Expand your business into new areas

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Decide whether a cash flow loan serves the best interest of your business

Ask yourself if it's worth losing a percentage of your profit to have your money in your hands now. If your business gains clients, but you can't afford to hire new staff because you're waiting on invoices, you should look at how a cash flow financing provides you with the means to hire new staff.

I recommend: Use a cash flow planner to help you know whether cash flow funding solves your business needs. Wells Fargo’s cash flow planner can help you decide. You may prefer to download the cash flow budget worksheet from Biz Owner’s Toolkit.

Use a reputable cash flow lender

As new companies enter the field, you need to make sure that you choose a lender with a good reputation. Look for comparable rates and fees with limited oversight from the company.

I recommend: Read reviews or testimonials when possible. Merchant Resources International (MRI) offers cash flow loans from $4,000 to $500,000 and provides testimonials from actual clients. Read testimonials for Commercial Capital Lending, LLC or pre-qualify online.

Check with the bank that handles your business accounts

Many banks now offer cash flow lending as a source of business finance. Your bank already has the financial information it needs to make a commercial cash flow loan decision. Plus it never hurts to be have a relationship with the lender prior to requesting a cash flow loan.

I recommend: Try Wells Fargo, which has over 3,200 locations in the Mid-west and Western states or Bank of America, which has locations in most states. Financial services vary by region.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Cash flow lenders look more at the credit worthiness of your clients than at your personal or business credit.
• •  Some cash flow loan lenders only work with certain industries. Verify that the lender you choose works with your industry before pursuing a cash flow loan.

Cash flow lending for businesses is based upon the measure of a single company's financial strength. Cash flow lenders use a standard equation in order to determine how much cash a company has to service a debt from a cash flow loan. The equation determines cash flow as being equal to cash receipts minus cash payments for any given time. And the answer to this equation is the debt coverage ratio of the company. This will determine what cash flow lending solutions are available to the company.

If you want to work for providers of cash flow loans, there are many topics that need to be covered. You will want to learn about business financing, good lending practices, and the best way to determine the debt coverage ratio of a business. You can find cash flow lending education and training through:

1. Training courses that teach cash flow funding.

2. Seminars that cover specialized topics in the field.

3. Education in banking and lending.

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Earn a college degree in banking to work in cash flow financing

Most colleges and universities will offer some type of banking or accounting degrees. A student can earn either a two or four year degree in banking and financing. This will give a person the basic financial knowledge needed to work towards specialized careers such as cash flow lending and other types of commercial banking.

I recommend: Rasmussen College offers an associate's degree in banking that teaches students lending practices and how to work with companies to determine loan options. Hofstra University offers a BA program in accounting and finance, with a concentration in banking.

Learn cash flow funding solutions through training courses

Whether you have an associate's or bachelor's degree, additional training courses in the specifics of commercial lending are recommended. These courses provide additional skills that cannot always be learned under a broad banking education.

I recommend: Credit Risk Management provides classes for those who want to learn cash flow lending practices for commercial or consumer lending. Edge Development Group provides training to learn the fundamentals of commercial lending practices.

Attend seminars to learn special topics on being a cash flow lender

Once you have training to be a cash flow lender, continuing education is important. This education will be able to keep you up to date on the latest market trends, better practices, and how the market is evolving over the long term. Seminars are a great learning tool for these purposes.

I recommend: Clear Choice Seminars provides a short course seminar in Cash flow Analysis for Asset Based Lending. The Risk Management Association provides a large listing of seminars and educational events that cover topics from commercial cash flow lending to negotiation skills for bankers.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Many cash flow lending companies will also host its own training programs to get employees the specific skills needed to work with its clients.

Cash flow lending helps businesses to manage cash flow by providing funds because of seasonal requirements, business expansions or declines. Cash flow loans help businesses generate cash for operations and acquisitions. When a company has predictable and sustainable cash flows or net income, it has more cash flow lending options available. There are cash flow lending key terms that both new and seasoned business owners should know before applying for a cash flow loan. Knowing these key terms will make negotiating loans less stressful. Become familiar with cash flow lending key terms to apply for a cash flow loan.

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Advance rate

Advance rate is the face amount percentage of an income stream that a funding source advances to a client. The percentage of advance rates is usually part of the total invoice amount.

I recommend: Find out about advanced rates for cash flow lending at 1st Commercial Credit.

Depreciation expense

Depreciation is a decrease in value of assets. Depreciation expense is the reducing of net earnings or cash flow to write off the costs of assets.

I recommend: Review the information about cash flow lending depreciation expense at AccountingCoach.com.

Amortization

Amortization is act of paying off debts by making scheduled periodic payments. Mortgages and loans are examples of items with systematic payments. The abbreviation (EBITDA) earnings before interest, taxes, depreciation and amortization, is commonly used with reference to amortization.

I recommend: Read the article highlighting Amortization (EBITDA) at Club Industry's Fitness Business Pro.

Recapitalization

Recapitalizations allows company owners to diversify their own personal wealth while they continue to maintain ownership of their business. Owners sell off portions of their equity to increase cash flow to benefit their company's continued growth.

I recommend: Gather information about recapitalization at EconomyWatch.

Cash flow lender

Cash flow lenders analyze the cash flow of businesses to ensure their ability to repay loans. Cash flow lenders also review things such as collateral as well as credit and payment histories as part of their decision whether to provide loans.

I recommend: Find out about the services offered by cash flow lender, Wells Fargo.

Due diligence

Due diligence is when a potential buyer evaluates the cash flow or liabilities of a company. The results of due diligence can be legally binding but often investigations are done voluntarily. When an investor is interested in acquiring a company and does an evaluation of their assets and liabilities, that is an example of due diligence. Due diligence is a common practice in business though the methods used may differ depending on a company's interests.

I recommend: Read the information that features due diligence in the article at Bank of America.